Less Incentive to Move? How the New Tax Bill Impacts South Bay Real Estate
First, let’s examine the facts.
The real estate market is among the most impacted of sectors by the $1.5 trillion tax bill passed this week by both the Senate and the House. President Donald Trump is expected to sign it into law in the coming days, or in January. Here are some of the variables expected to impact the US real estate market:
Reduced corporate tax rate
Reduced tax rates for individuals with higher standard deductions
Reduced mortgage interest deduction, previously allowed on the first $1,000,000 borrowed, now limited to a new $750,000 cap
Note: mortgages on second homes can be included toward a household’s mortgage interest deduction.
Also of Note: current homeowners will be grandfathered under the previous $1M deduction.
Reduced property tax deduction to a $10,000 cap, where there previously was no cap
Note: many of the Beach Cities have a combined state and local property tax rate in the neighborhood of 1.1% annually, so virtually every single family residence will exceed the cap, which kicks in just above a $900,000 appraised value.
We can breathe a sign of relief that the extended occupancy requirement to claim the capital gains exemption [allowing up to $250,000 for an individual or $500,000 for a couple on the proceeds from the sale of their home to be exempt from tax] was not increased. The current requirement is that you have lived in the residence 2 of the past 5 years, and both the House and the Senate had approved an increase to require occupancy 5 of the last 8 years. But it did not make it to the final bill passed.
Knowing the facts brings the logical question: How will these new tax bill changes effect our market in the South Bay of Los Angeles?
The housing market in South Bay has been on a roll the last several years, with more homes sold in Manhattan Beach so far this year (417) than in any of the past 4 years. With prices having dropped ~20% during the downturn around 2007-2009, the frenzy after the rebound in 2013-2015 has disappeared, however prices today have surged to record highs.
We hear on a daily basis of the growth of corporate investment in and surrounding South Bay.
Considering our recent local boom with so many tax changes coming, many are concerned (or hopeful) that this will fuel a slowdown in both buyers and sellers.
Sellers/Buyers looking to trade up have to consider how this impacts their total cost. If they are receiving an extra $250,000 write off for their current mortgage, it is less of an incentive to move. And if their current property is appraised below market value, they are saving on property taxes, as well.
First-time buyers may choose to continue renting, while they wait to see if prices slide before jumping in the market.
For the upper end of the market, particularly over $3 million, these home owners have always been beyond the deduction and are many times cash buyers.
Clearly there are still many incentives for home-ownership, however for some, there may be a few less extra dollars left for the decorating fund than before the changes. One thing is for sure: nothing is certain, especially in the real estate market. Here’s to an interesting year ahead. Merry Christmas and Happy New Year to you and your family.